Why the Government's car plan is a scandal

And what is all this for? According to the Prime Minister, because of the jobs at stake: according to him, 200,000 of them. But even this number is suspect. As both the Productivity Commission and the Bracks review note, the industry employs fewer than 70,000 people. The Victorian government generously estimates that a further 100,000 jobs indirectly depend on the industry. So where are the additional 30,000 jobs the Prime Minister is referring to? Or are they merely thrown in for effect?

But even were the Prime Minister right, according to the Productivity Commission’s modelling, cutting tariffs by half and phasing out current non-tariff assistance would lead to a contraction in car industry employment of only about 3.5 per cent, or less than 2,400 jobs. Is the Prime Minister suggesting that the Commission is wrong by a factor not of 2, nor even of 3, but of 80? If so, wherever is the evidence on which he relies? Or is he merely stating that the industry is important? If so, will all important industries get assistance, in a throw-back to the days of “protection all around”?

As for the Industry Minister, he claims that “automotive manufacturing sits at the core the nation's manufacturing effort, because building a modern car involves almost every advanced technology we use, from microchips to light metals”. But in the great class of sequiturs, this is a non, for the same could be said for everything from flipping burgers (visit a McDonalds) to assembling Playstations. Why would using lots of diverse inputs make an activity more deserving of public support than any other? And will all activities that use lots of inputs get assistance, presumably at the expense of the very input producers on which they rely?

What about the Industry Minister’s claim that other countries also subsidise their car industry? In fact, no developed country provides assistance at a rate anywhere near that which the government has announced. But even were the claim correct, how could it possibly be rational for us to follow the errors of others? Rather, we should draw what benefit we can from the subsidies they provide, and, if those subsidies distort trade, rely on the WTO disputes process to seek redress. If, as we constantly claim, those processes are good enough for others, why aren’t they good enough for us?

Ultimately, it would have been better if the government had simply left the previous arrangements in place. True, the tariff would have been higher, but at least tariffs raise revenues, thus allowing other, more distorting, taxes to be lower, and they are less hypocritical than the meaningless verbiage being used to justify the new plan. Moreover, once the tariff is set, it is market forces that allocate its burden and its benefits. In contrast, the billions the government has set aside will be allocated through processes that seem as lacking in transparency as they are in economic rationality and effective accountability.

Indeed, this is becoming the government’s modus operandi: set up massive slush funds that can be used to strengthen existing constituencies, or even create new constituencies, whose fortunes hinge on its remaining in office. The Building Australia Fund set the pace; the car plan goes to new heights. The government’s refusal to ensure full transparency of these funding decisions - in stark contrast to international best practice - makes the risks of abuse all the greater.

Economists differ about many things, but on one point there is consensus: the quality of public expenditure is every bit as important as its level. It is inevitable, indeed desirable, that a slowing economy will reduce the budget surplus. But there is nothing inevitable or desirable about the extraordinary deterioration now underway in the quality of the government’s spending decisions.

Malcolm Turnbull somewhat cruelly described the government’s first budget as “Morris Iemma comes to Canberra”. It will take better than the car plan to prove him wrong.